ULIPs vs Mutual Funds: Which Is Better for Investment in 2025?

ULIPs and mutual funds are popular investment options in India. A Unit Linked Insurance Plan provides insurance and an opportunity to invest your money. A part of the premium is used for life insurance, and the rest is invested in equity, debt, or hybrid funds. On the other hand, professional fund managers control mutual funds, which are purely designed for investing. Money contributed by investors is pooled and invested in instruments such as stocks and bonds.

ULIPs cannot be withdrawn for five years, but mutual funds provide greater freedom in accessing money. Deciding between ULIPs vs mutual funds requires understanding your financial goals and the level of risk you are willing to take. Both products help people increase their wealth, but for different reasons. Learning about their features can guide you to make better decisions about your investments.

Understanding the Basics: What Are ULIPs and Mutual Funds?

When choosing investments, the question of ULIPs vs. mutual funds often arises. Each product helps your money grow, but it is not meant for the same purpose. Let’s make these simpler to understand.

What is a ULIP (Unit Linked Insurance Plan)?

A ULIP allows you to invest and receive insurance coverage simultaneously. One part of what you pay goes to insurance coverage for you and your family within the policy, while some of it is invested in financial markets. ULIPs require investors to hold onto them for at least five years. They work well for long-term goals, but there are fees associated with services such as fund management and policy administration.

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What is a Mutual Fund?

Investors pool money to form a mutual fund. The funds are managed by buying stocks, bonds, and money market instruments to diversify the portfolio. Professional fund managers handle these funds. Investing in mutual funds gives you an instant mix of investments, which protects you from market risks to a certain extent. Moreover, they are overseen by Indian market regulators.

Key Differences Between ULIPs and Mutual Funds

At a glance, ULIPs and mutual funds might look pretty much the same, but actually, they are created for different reasons. Both products are meant to increase investor wealth, but they differ in terms of returns, fees, waiting periods, and tax advantages.

Investment Purpose and Insurance Coverage

ULIPs blend insurance with investment opportunities. They give you life protection and return on your investment. If death occurs, the policy guarantees the dependent family gets the payout. By comparison, mutual funds are designed exclusively to make a profit and do not provide insurance.

Lock-in Period and Liquidity

You must keep your money in a ULIP for at least 3 to 5 years before you can withdraw it. Withdrawing your funds before the time mentioned is not allowed. The lock-in period for ELSS mutual funds is three years, whereas other open-ended mutual fund categories may not have such withdrawal restrictions.

Cost Structures and Charges

The reason ULIPs charge more is that they have administrative fees, premium allocation charges, mortality charges, and fund management fees. These charges eat into the gains from the investment you receive over the years. Money managed in mutual funds costs less since there are no insurance charges, and expenses are lower; therefore, in the long run, it works out to be a better alternative.

Tax Benefits Under Section 80C and Section 10(10D)

If you invest in ULIPs, you can save tax on annual premiums of up to ₹1.5 lakh by claiming a deduction under Section 80C, and the maturity amount is tax-free under Section 10(10D) if you stay within the ₹2.5 lakh annual premium limit. However, if your ULIP policy matured after 1 February 2021, it is taxable if the annual premium amount exceeds₹2.5 lakh. Mutual funds only allow tax deductions for ELSS under 80C. ELSS investments made in a financial year are eligible for a deduction of up to Rs. 1.5 lakh per year, reducing your taxable income. Gains on ELSS are subject to the LTCG rate of 12.5% on capital gains in a financial year above the limit of Rs. 1.25 lakh a year.

Suitability: Choosing Based on Your Financial Goals

When comparing ULIPs to mutual funds, consider your personal goals first. We can assess which product is more suitable for different situations.

Best for Investors Needing Life Insurance

ULIPs allow you to invest for the future while also getting life insurance. You should consider investing in ULIPs if you want an investment product that combines insurance. You get a guaranteed death benefit paid to your nominee in case of life insurance, while mutual funds do not offer this benefit. Because of this, ULIPs are well-suited for those looking for both protection and investment at the same time.

Best for Investors with Existing Insurance Cover

Mutual funds may be more suitable if you have adequate life insurance coverage. Mutual funds focus entirely on growing money through investments. You should pick between equity, debt, or hybrid funds depending on your tolerance for risk. There is more transparency and flexibility available when you invest in mutual funds.

Best Option for Tax Planning

Tax advantages are found in both ULIPs and mutual funds. Both premiums and withdrawals during maturity from ULIPs are tax-free, according to Section 80C and Section 10(10D). Tax deduction for ELSS mutual funds is allowed under Section 80C, but a 3-year lock-in period is part of the investment. To save tax and get insurance in one, ULIPs are your best bet.

Best for Liquidity and Flexibility

Mutual funds make it easier to buy and sell shares. You can withdraw your funds anytime (not possible with ELSS). If you take money out of a ULIP before the five-year term, you have to pay a penalty. If you want to access your funds with no hassle, mutual funds are for you.

Best for Long-Term Wealth Creation

Lower fees charged by mutual funds can lead to better investment returns. Charges for ULIPs tend to be the highest in earlier years. If you focus on making more money, mutual funds generally work better. The differences between ULIPs and mutual funds depend on your needs: wealth creation, tax savings, flexibility, or insurance.

Real-World Cost and Return Comparison

When comparing ULIPs vs. mutual funds, consider that costs could impact your results over a long period.

ULIP Charges and Impact on Returns

Some of the charges associated with ULIPs include premium allocation, mortality, fund management fees (up to 1.35%), policy administration, and part withdrawal fees. Deducting costs from your investment should be done before investing

To illustrate, the first charges to be taken are for premium allocation, and the investment amount decreases daily due to mortality contributions, which depend on age and health.

Mutual Fund Returns vs Benchmark

A mutual fund’s performance is assessed against the selected benchmark. If a fund performs better than the benchmark by avoiding significant drops in its net asset value, it is said to outperform. Since they don’t offer insurance, mutual funds typically have lower costs, which leads to greater capital growth within the fund.

Regulatory Oversight and Market Trends

In India, there are ULIPs and mutual funds, each with its specific structures and regulations. They both offer investment options, but are managed and intended for different types of investors.

IRDAI and SEBI Guidelines

The Insurance Regulatory and Development Authority of India (IRDAI) oversees the Unit Linked Insurance Plan (ULIP). Some of the premium is used for life insurance, and the rest is invested in funds such as equity, debt, or hybrid types. You must keep your ULIP investment locked for at least 5 years.

Mutual funds supervised by the Securities and Exchange Board of India (SEBI) allow for flexible investment unless the fund is of the ELSS type, which requires a lock-in period.

Growth of Mutual Fund AUM in India

Assets under management in mutual funds have experienced significant growth. In 2024, the amount of money managed by small-cap funds was ₹3.26 lakh crore, and that of mid-cap funds was ₹3.89 lakh crore. ₹3.62 lakh crore was invested in large-cap funds. There was a 79% increase in sectoral and thematic funds compared to the previous year. Index funds, ETFs, and those based on gold grew by 28%, showing that people are interested in investing in them.

Shifts in Investor Preferences

Investors in 2024 preferred small- and mid-cap funds, thematic investments, and passive approaches. This reflects the desire for higher earnings and a wider range of investment options. If we compare ULIPs vs mutual funds, you can withdraw your money faster from mutual funds, but ULIPs make your investments more disciplined and cover expenses like insurance.

Conclusion

Your financial targets will help you pick between ULIPs and mutual funds. ULIPs let investors enjoy both insurance and savings over a long period. If your main goal is to build wealth and you want quick access to your funds, mutual funds are a better choice.

ULIPs are for you if you want the benefits of insurance as well as returns. If you want better returns and don’t need insurance, consider mutual funds. Always look at your tolerance for risk and timeline when comparing ULIPs vs mutual funds.

FAQs

1. What is the main difference between ULIPs and mutual funds?

ULIPs provide the features of life insurance as well as an investment opportunity. Mutual funds only allow you to invest in different options. ULIPs require you to keep your money for a minimum period, but not all mutual funds are like that.

2. Which offers better returns—ULIP or mutual fund?

Because of their lower costs, mutual funds tend to provide better returns. Exposure to the equity market gives mutual funds greater control over pricing.

3. Can I exit a ULIP before 5 years?

The IRDAI has mandated a five-year lock-in period for ULIP policies. While you can surrender, your funds will be subject to discontinuance charges and moved to a discontinued policy fund, with the remaining proceeds made available after the five-year period ends.

4. Are mutual funds taxable after 3 years?

Gains from units held for more than three years are treated as long-term capital gains (LTCG). STCG tax applies if the investment is held for less than three years.

5. Is it wise to invest in ULIP for tax benefits?

If you meet the requirements, the maturity of ULIPs is not taxed under Section 80C. Choose these only when you require both insurance and a future investment.

6. What are the hidden charges in ULIPs?

Fees in ULIPs are found in premium allocation, administration, mortality, the management of funds, and when you switch policies. They make it harder to earn from investments in the first few years.

7. Are ULIPs riskier than mutual funds?

There are market risks in both. Risk in ULIP depends on the funds you pick. You get more information and choices when you use mutual funds.

8. Can I switch funds in ULIP without tax?

You don’t have to pay taxes when you switch funds within a Unit Linked Insurance Plan. As a result, you can move your investments between different funds without incurring any capital gains tax on the switched amount.

9. Which is better for beginners—ULIP or mutual fund?

Since mutual funds have low costs, they are easier for new investors to handle. They are simpler to follow and offer various options to suit your risk tolerance.